Supreme Court Requires Auto Insurers To Share Cost of Recovering Subrogated PIP Payments From Third-Party Tortfeasors:
Mahler and Fisher v. State FarmBy Charlie Wiggins
WSTLA News, July 1998
Last month the Washington Supreme Court issued a decision that automobile insurance companies must pay their fair share of the cost of recovering the plaintiff's damages from the underlying tortfeasor when the insurance companies seek reimbursement from the plaintiff's recovery of Personal Injury Payments. A landmark decision written by Justice Talmadge rejected State Farm's argument that State Farm could recover its PIP payments through inter-insurer arbitration without sharing the attorney fees and costs incurred by the plaintiff in recovering from the defendant. Mahler v. Szucs and State Farm, and Fisher v. Aldi Tire and State Farm, No. 64344-0 (6/4/98).
Both cases arise out of a familiar fact pattern. Plaintiff Mahler was injured when defendant Szucs pulled out in front of her car. She collected PIP benefits of $4173 from State Farm and sued Szucs. Szucs eventually settled with Mahler for $24,250. Plaintiff Fisher was struck from behind as she waited to make a left turn. She collected $12,222 in PIP benefits from State Farm and sued Aldi Tire. In the inimitable language of Fisher's attorney, Pat LePley, he did everything "but hammer at the gates of hell" before extracting a settlement from Aldi Tire for $40,000. In both cases State Farm insisted that it was entitled to recover its PIP payments without having to share in the plaintiff's attorney fees and costs.
Many attorneys would have given up and not fought State Farm for $1700 in attorney fees in Mahler or $3900 in Fisher. But Pat LePley, who represented Fisher, and Bill Bailey, who represented Mahler, believing that an important principle was at stake, decided to push for a resolution of this recurrent problem. In Snohomish County, LePley lost a summary judgment motion, won a remand from the Court of Appeals, Fisher v. Aldi Tire, 78 Wn.App. 902, 902 P.2d 166 (1995), and then lost a summary judgment on remand. In the meantime, LePley and Richard Kilpatrick substituted for Bailey and won a summary judgment in King County. The Supreme Court accepted direct review and consolidated the cases. Charlie Wiggins served as plaintiff's lead counsel on appeal in both cases.
State Farm's policy provided that it would pay its share of the legal expenses of recovering PIP payments from the party at fault if "we share in the recovery." But State Farm claimed that it would not "share in the recovery" because its policy allowed it to recover any PIP payments directly from the tortfeasor's insurer through intercompany arbitration: "This does not apply to any amounts recovered or recoverable by us from any other insurer under any inter-insurer arbitration agreement." Justice Talmadge had no trouble dissipating the fog of State Farm's arguments. State Farm was claiming it was subrogated to plaintiffs' claims and therefore could recover from the insurer for the underlying tortfeasor through inter-company arbitration. The Supreme Court noted that the plaintiffs had no claims directly against any insurer, only against the underlying tortfeasors, Szucs and Aldi Tire. Since the Inter-Company Arbitration agreement expressly states that it does not create any new claims, the Supreme Court was "at a loss to understand what State Farm believes is 'recoverable' against the tortfeasors' insurers." Slip Op. at 28. Moreover, once Mahler and Fisher settled with the underlying tortfeasors, nothing was "recoverable" against the tortfeasors or their insurers. Thus, inter-insurer arbitration was not available, nothing was recoverable, and State Farm was required to pay its fair share of Mahler's and Fisher's expenses in incurring the recovery. Finally, the Court rejected State Farm's policy arguments, noting that "we consider it odd for State Farm to be contending that its own contract language [to pay its equitable portion of the plaintiff's expenses] is bad public policy." Slip Op. at 31.
What does this decision mean for you and your clients? First and foremost, if your client collects PIP payments under State Farm's policy language, State Farm has a right of reimbursement from any settlement or judgment, provided the client is fully compensated for his or her injuries after reimbursing State Farm. But the client is obligated to pay its fair share of your fees. Second, any other insurer with similar policy language will also be obligated to pay its share of your fees. Third, any insurer whose policy is silent on its obligation to pay a fair share of your fees in recovering from the underlying tortfeasor will probably also have to pay as well. Although the Court did not directly resolve this question, Slip Op. at fn. 16, the equitable rule of sharing expenses was recognized by the Court in an earlier decision. See fn. 17, and Metropolitan Life Ins. Co. v. Ritz, 70 Wn.2d 317, 422 P.2d 780 (1967).
Mahler/Fisher may overrule a series of Court of Appeals decisions following the rule that, "[A]n insurer who makes a recovery from a third party for moneys paid its insured is only required to pay attorney fees which were 'reasonably and necessarily incurred' to make the recovery." Pena v. Thorington, 23 Wn. App. 277, 281, 595 P.2d 61 (1979). The Supreme Court agreed with a concession by State Farm that under the State Farm policy, "there is no additional requirement that the efforts of the insured's attorney be necessary to State Farm's recovery, or that they benefit State Farm." Slip Op. at 26. Although this result may turn on the precise language of the State Farm policy, other policies may contain similar language, and the Supreme Court showed no inclination to adhere to the Pena rationale.
Mahler/Fisher does not directly tell us how these issues will be decided under significantly different policy language. But Justice Talmadge noted that an insurance company in this situation "stands in the shoes" of the plaintiff in seeking recovery of its PIP payments from the underlying tortfeasor, but when the plaintiff chooses to pursue his or her own recovery, the insurer "has no shoes to step into to pursue subrogation." Slip Op. at 16. The Court also expressed its serious doubt that an insurance company could split off the subrogated PIP recovery and pursue its own independent action against the tortfeasor, either during or after the plaintiff pursued his or her own action against the tortfeasor. Slip Op. at 17 fn. 7. Thus, the insurance company is probably relegated to sitting on the sidelines waiting for the plaintiff to pursue his or her own action, and then seeking reimbursement from any recovery by the plaintiff. Once the plaintiff incurs the expense of obtaining the recovery, the insurance company is probably required by the equitable principles of subrogation to pay its fair share of the expense of pursuing recovery.
Unfortunately, the Court held that Mahler and Fisher could not recover their attorney fees incurred in litigating State Farm's policy obligations under Olympic SS Co. v. Centennial Ins. Co., 117 Wn.2d 37, 811 P.2d 673 (1991). The Court reasoned that the dispute "boils down to the value of [State Farm's] right of reimbursement" and that this was a factual dispute for which plaintiffs could not recover fees under Olympic Steamship. Slip Op. at 40. This result is inconsistent with prior caselaw under Olympic Steamship. It is unclear whether this result will apply outside the context of these PIP subrogation cases.
A copy of the opinion may be obtained on the Internet at the Court Opinions site or by calling WSTLA. State Farm was represented by Harold Fasso and Bill Hickman. Plaintiffs were represented by WSTLA members Pat LePley, Bill Bailey, Dick Kilpatrick and Charlie Wiggins.
Note: Charlie Wiggins, a former Court of Appeals judge, advises attorneys on appellate issues and represents clients in all phases of appeals.